Exercise 10-98 Determining the internal rate of return Ronnie Gentry, CFO of Ode

Question

Exercise 10-98 Determining the internal rate of return Ronnie Gentry, CFO of Odessa Enterprises, is evaluating an opportunity to invest in additional manu- facturing equipment that will enable the company to increase its net cash inflows by $250,000 per year. The equipment costs $858,270.25. It is expected to have a five-year useful life and a zero salvage value. Odessa's cost of capital is 10 percent. Required a. Calculate the internal rate of return of the investment opportunity b. Indicate whether Odessa should purchase the equipment.

Explanation / Answer

a PV factor for internal rate of return = 858270.25/250000= 3.433 Internal rate of return = 14% b Yes, the equipment shoule be purchased as Internal rate of return is greater than cost of capital

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